In a meaningful victory for shareholders, Levi & Korsinsky attorneys recently defeated two motions to dismiss a securities fraud class action brought on behalf of investors who purchased common stock issued in Stronghold Digital Mining, Inc.’s IPO._[1] Stronghold is pending in the United States District Court for the Southern District of New York before United States District Judge Ronnie Abrams. Judge Abrams’ decision on the motions to dismiss offered important clarity on the requirements for successfully pleading a claim brought pursuant to the Securities Act of 1933, and may offer substantial protections for all IPO investors going forward._[2] Specifically, the Stronghold decision clarified that under the Securities Act, a plaintiff only needs to allege that the facts and circumstances making a defendant’s statement false or misleading were knowable to the defendant—such facts do not need to have been actually known by the defendant. Judge Abrams also rejected the Stronghold defendants’ argument that the plaintiffs failed to allege “loss causation” because such an argument is almost always inappropriate to make prior to fact and expert discovery._[3]

The plaintiffs in the Stronghold action alleged that offering documents published in connection with Stronghold’s October 2021 IPO included a number of disclosures regarding anticipated delivery of certain cryptocurrency mining equipment that were materially false and misleading._[4] When defendants issue a communication in connection with an IPO that ‘include[s] an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading,” Section 11 of the Securities Act is violated._[5] The Stronghold Court looked to previously “settled” case law, and held that individuals or entities that make misleading statements in connection with an IPO are liable under Section 11 even if those statements are made “innocent[ly].”_[6] Therefore—unlike allegations pursuant to antifraud provisions of federal securities law (such as Section 10(b) of the Securities Exchange Act of 1934)—Section 11 allegations are not required to include that the defendants spoke with a culpable state of mind._[7]

As is common in Section 11 litigation, the Stronghold defendants nevertheless argued that the alleged misstatements could only be actionable if the defendants either “knew or should have known” the facts and circumstances that made the statements misleading._[8] In her August 10^th opinion in Stronghold, Judge Abrams explained that the only requirements under Section 11 are that, at the time of the IPO: (1) the statements at issue are false or misleading and (2) the facts and circumstances that make the statements misleading are “knowable.”_[9] Critically, Judge Abrams emphasized that “whether a fact [is] “knowable” at the time of a securities offering is not the same as whether a defendant “knew,” or “should have known” of that fact.”_[10]

In addition, the Stronghold opinion reiterated that a plaintiff asserting a claim under Section 11 of the Securities Act does not need to allege “loss causation”—i.e. a causal connection between the alleged misstatements and the losses suffered by the class._[11]  In moving to dismiss a complaint, defendants can raise “negative causation”—ie., the absence of loss causation—as an affirmative defense._[12] But defendants’ burden in arguing negative causation is “a heavy one,” and, except in an “unusual” case, defendants can generally meet this burden only later in the litigation process—generally, at the summary judgment or trial phase after the parties have been able to obtain pertinent business records, take depositions, and confer with expert witnesses in the discovery process.[13] In Stronghold, the defendants proffered two arguments in support of a negative causation defense: that the truth had emerged prior to the date plaintiffs suggested and that the stock price decline was wholly attributable to factors other than the allegedly false representations._[14] The court rejected both arguments and concluded that “[i]n sum, given the burden on Defendants to establish an affirmative defense such as negative causation, dismissal on that basis is more properly considered on a motion for summary judgment.”_[15]

_[1] See Winter v. Stronghold Digital Mining, Inc., No. 22-CV-3088 (RA), 2023 WL 5152177 (S.D.N.Y. Aug. 10, 2023) (“Stronghold”).
_[2] Id.
_[3] Id., at 7-10.
_[4] Id., at *2-3.
_[5] 15 U.S.C.A. § 77k.
_[6] See e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983).
_[7]  See e.g., Rombach v. Chang, 355 F.3d 164, 169 n. 4 (2d Cir.2004).
_[8] Stronghold, 2023 WL 5152177, at *7.
_[9] Id., at *7-8.
_[10] Id. at *7 (emphasis added).
_[11] Id., at *10; see also, In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010); In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419 (S.D.N.Y. 2009); Levine v. AtriCure, Inc., 508 F. Supp. 2d 268, 272 (S.D.N.Y. 2007).
_[12] Stronghold, 2023 WL 5152177, at *10.
_[13] Id.
_[14] Id.
_[15] Id. (cleaned up and citation omitted).